Under the Fair Labor Standards Act (FLSA), employers are required to pay non-exempt employees time and a half their regular rate for any hours worked over 40 in a single workweek. Bonus payments must be included in the regular rate calculation, unless the bonuses are discretionary (as defined by the FLSA). A bonus is discretionary only if it meets all the following statutory requirements:
- The employer has the sole discretion, until or near the end of the period that corresponds to the bonus, to determine whether to pay the bonus and to determine the amount of the bonus; and
- The bonus payment is not made according to any prior contract, agreement or promise causing an employee to expect such payments regularly.
In Edwards v. 4JLJ, LLC, the Fifth Circuit Court of Appeals considered, as a matter of first impression to the Fifth Circuit, which party (employer or employee) bears the burden of proving that a bonus should be included in the employee’s regular rate for purposes of calculating overtime pay. The court ultimately ruled that the employee bears this burden, diverging from other circuit court of appeals’ (for example the Fourth and Eighth Circuits) rulings on this issue and creating a circuit split.
The case began when a group of frack and pump hand employees brought suit claiming that their employer, an oil well pump and fracking company, 4JLJ, LLC (4JLJ) violated the FLSA by failing to include two bonuses for which they were eligible in their regular rate when calculating their overtime compensation. 4JLJ obtained a favorable jury verdict finding that that neither bonus needed to be included in the employees’ regular rate.
The Fifth Circuit partially reversed the jury verdict, finding that the frack and pump hand employees had clearly proven that they were not fairly compensated as to one of the bonuses. The employees argued (and ultimately prevailed on Appeal) that a “performance bonus” for which they were eligible was non-discretionary. The employees’ argument rested on the fact that this particular bonus was described in the employees’ contract along with provisions which outlined how the bonus was earned and an expected amount of the bonus and thus was not a discretionary bonus, but rather a bonus to which they had been promised upon the fulfillment of certain conditions and in a particular amount. The Fifth Circuit agreed that because the possible payment was promised in writing along with a set pay scale, the employees had met their burden of proof that the bonus was “nondiscretionary under the FLSA, and 4JLJ ought to have included them in the regular rate.”
The Fifth Circuit, however, did not set aside the jury verdict in favor of 4JLJ regarding a second “Stage Bonus” that was paid when a new stage of a fracking operation was completed. The Fifth Circuit upheld the jury’s findings that the bonus was discretionary because the bonuses “were not memorialized in writing,” and the employees did not point to any evidence that explained “how employees came to expect stage bonuses, who determined the amount, when the amount was determined, whether all employees typically received such bonuses, or whether the amount ever varied.’”
The lesson from Edwards is mixed. It is good news for employers (at least in the Fifth Circuit) that employees bear the burden of proof when arguing that a bonus payment should be included in their regular rate for purposes of calculating overtime pay. However, the Edwards case illustrates that this burden is not insurmountable, and employers often need to include bonuses in their employees’ regular rate when calculating overtime. Employers should exercise caution when implementing a discretionary bonus to avoid creating a promise or expectation of the bonus in a set amount if certain measurable goals are achieved.